Making maths make money: Will analytical models of complex systems in nature also predict the movements of financial markets? Mathematicians in the US are hoping to get rich while they find out

By ROGER LEWIN

Doyne Farmer looks with quiet satisfaction on his recent research into
complex physical phenomena. ‘We are certainly seeing results that give us
confidence,’ he says. ‘We could publish papers that would really shake up
the economic community.’ But Farmer and his colleagues won’t be publishing
their results; they won’t be publishing anything, except perhaps profit
and loss accounts. Mainly profits, they hope.

Until recently, Farmer was head of the nonlinear dynamics group at Los
Alamos National Laboratory, New Mexico, probably the most high powered intellectual
crucible of thinking on complex systems. Such systems often look random,
but in fact contain elements of predictability that can be traced. Chaos
theory is just one example – the most widely known – of how to analyse complex
systems. ‘Most systems in the world are nonlinear,’ explains Farmer, ‘and
we are just beginning to understand them.’ Only the development of powerful
computers has enabled scientists to peer into nonlinear phenomena – conventional
mathematical analysis cannot cope. Farmer believes that the study of nonlinear
systems will become as hot commercially as it is intellectually.

A little more than a decade ago, Farmer was one of a group of young
researchers at the University of California, Santa Cruz, who helped to push
the newly emerging science of chaos into the arena of academic respectability.
Now, with Norman Packard, another of the Santa Cruz crew, Farmer is at the
scientific head of the Prediction Company, a formidable assembly of physicists
and computer whizzes who aim to exploit new methods of analysis to penetrate
the uncertainties of financial markets.

‘We hope to demonstrate that there are pockets of predictability in …

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